Starting a Business – Objectives and Strategy – Part 2

 

In Starting a Business, it is important to carefully evaluate your business objectives and strategy at an early stage.  Using the Six Minute Strategist methodology, six factors have been identified to bring structure and clarity to this process.

In this post, the second of two on this subject,  I want to discuss three strategic frameworks for formulating a business growth strategy.  These theoretical frameworks enable an enterpreneur to apply structure and rigour to setting out his strategic objectives for his business.

The first of these is Competitive Advantage which was proposed by Michael Porter in his book of the same name in 1985.

Competitive advantage is defined as “the strategic advantage one business entity has over its rival entities within its competitive industry. Achieving competitive advantage strengthens and positions a business better within the business environment.”

Porter argues for that there are four generic strategies that a business can follow:

Differentiation

Companies set out to offer the market a product or service with specific characteristics unique to themselves, including branding.  Using these key differences, the company can charge a premium price to reflect the additional costs and value associated with those specific factors.  This is typical of the market position of luxury consumer goods businesses.

Cost Leadership

The objective of the company is to be the lowest cost producer in the market.  If the company charges prices equivalent to the “going rate” the company should then benefit from the best profit margins.  This strategy is normally achieved through economies of scale.  Associated with this is discount pricing to put higher cost competitors under pressure and subsequently take greater market share.  Examples are large supermarket chains and OEM computer manufacturers.

Differentiation Focus

With this strategy, companies aim to dominate a small or niche market with a clearly stated set of differentiating factors.  In doing this, the company aims to compete against larger companies who may be striving for Cost Leadership or Differentiation.  Niche retailers often adopt this approach

Cost Focus

Here the low cost strategy is applied to a limited part of the market or a niche.  The product may be basic and not as fully featured but as a “me-too” product appeals to consumers on the basis of price.  “Own label” products can fall into this category.

BCG Matrix

This tool was designed to assist businesses to allocated resources.  It is also applicable when considering strategy when starting a business.  The founder should be aiming to build a company which can take a significant market share/position in a high growth market

Stars – are high growth businesses in a market where they are comparatively strong.  They require investment to maintain this position

Cash Cows – are low growth businesses in a market where they have a relatively strong position.  They require relatively little investment and tend to be cash generating

Question Marks – are companies with low market share but which are operating in higher growth markets.  The challenge for these companies is to justify further investment

Dogs – low market share in low growth markets.  Probably breaking even, these business cannot justify further investment.

The strategic response is again fourfold

• Build share
• Hold
• Harvest
• Divest

McKinsey Pyramid

This model proposes that a business should develop growth strategies based on

• Operational skills – core competences in the business
• Privileged Assets – these differentiate the company from its competitors
• Growth Skills – needed to enable the company to implement a growth strategy
• Special Relationships – with external parties, giving the company privileged access to markets or customers.

The model argues that there are seven ways of achieving a growth strategy

Existing Products to Existing Customers – lowest risk, greater frequency of purchase by the customer and based on customer loyalty

Existing Products to New Customers – finding new customers for existing products

New Products and Services – increased risk by developing new products and services which can be sold to both existing customers and new customers

New Delivery Approaches – using new channels to market to reach more customers

New Geographies – this can be one of the most opportune routes to growth but involves higher risk and is more difficult

New Industry Structure – involves consolidating the industry through acquisition thereby changing the competitive dynamics.

New Competitive Arenas – involves possible vertical integration or taking the business into completely new industries.

Six Minute Strategist Start Up Course – Is this for you?

Are you struggling to get your Start-Up Started?

Do you need to learn more about Business and Financial Plans

Do you need to learn how to pitch to investors?

Take a look at my brief Video…

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Now go and check out the Course at https://jbdcolley.com/startup

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